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Google "Iron Man, Tony Stark" and within the first few results you'll find Websites likening that superhero to Elon Musk, 41, the entrepreneur behind PayPal, the rocket maker SpaceX, and the electric-car sensation
Tesla Motors.TSLA -0.2398890513137674%Tesla Motors Inc.U.S.: NasdaqUSD266.15
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The comparison's apt. Musk is smart and stylish, and he fights planetary threats like global warming by creating spacecraft and zero-emissions cars that shame NASA and the auto giants. He's as rich as Iron Man's armored billionaire, too. Tesla shares rocketed this year from $35 to $115 -- lifting the Palo Alto auto start-up to a market value of $14 billion at May's end -- before easing back to a recent $102, where Musk's quarter-interest in the company is still worth $3.4 billion.

It's possible to admire Musk's achievements, while still wondering if Tesla's stock market fans are viewing its prospects through 3D glasses. The towering expectations now priced into the stock don't account for the Grand Canyon leap that Tesla must make to reach its goal of cutting its car's $90,000-plus sticker price in half. Electric-car batteries cost a heck of a lot, and today's Tesla Model S owes its better-than-200-mile range to batteries costing tens of thousands of dollars. Industries and governments around the world have spent billions on battery research, but few expect to trim electric-car battery costs by more than 20%-30% by the planned 2016 launch of Tesla's car for the Everyman. Perhaps Musk will confound the industry again, but if Tesla's next-generation car can't go the distance at half the price, its stock will head much lower.

One ingredient that fueled Tesla's (ticker: TSLA) tripling this year was an epic squeeze of those comic-book villains who had doubted Musk and sold more than a third of free-trading Tesla shares short. That fuel seems spent, for the moment. Traders say that the recently unborrowable shares are available again and can be had for a single-digit interest rate, instead of last month's 90% vig. With the shorts in retreat, Tesla should trade more in line with its fundamentals.

TESLA'S MODEL S SEDAN has won every car award in sight, and test drives by several Barron's staffers convinced us the Model S deserves the accolades. It has attracted 10,000 buyers in less than a year, and Musk told shareholders at last Tuesday's annual meeting that North American sales for the electric luxury car look as if they'll be 15,000 units this year.

But it will take time to discover how much sustained demand there is for a marvel priced above $90,000 (the price for a Model S Performance version, after a $7,500 federal tax credit). No one yet knows what portion of Tesla's initial buyers were "early adopters," unrepresentative of ongoing demand. Tesla irked analysts last month when it stopped disclosing its end-of-quarter order backlog -- which might have shed light on the issue -- after previously trumpeting a 15,000-unit reservation list.

The Model S won't get Tesla profits to a level that justifies today's stock price. The company expects to sell 21,000 worldwide this year, and Musk told shareholders on Tuesday that the car's annual sales might eventually reach 30,000 or 40,000. At about the 30,000 units that most bullish analysts predict for 2014, Tesla might earn about a buck a share (if you don't count the expense of stock options) -- which means the $102 stock is flying at 100 times next year's earnings forecast.

A top-of-the-line SUV called the Model X will bolster sales volume in 2015, but today's stock price is really a bet that Tesla can sell hundreds of thousands of cars a year, starting with the late 2016 launch of the Gen III that's supposed to cost well under $50,000. But there will have to be breakthroughs in battery technology to get Tesla to that price level without skimping on range; the Model S can go more than 200 miles on a charge. A battery-starved Gen III would encounter the same disappointing demand as other affordable electrics, like the
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Focus EV (F), or
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' (GM) plug-in hybrid Chevy Volt.

Stubbornly costly batteries may even cause headaches when today's Tesla's luxury cars arrive on the used-car lot. Folks who buy $90,000 cars tend to replace them every few years, and the bid for a four-year-old Model S may prove disappointing if it's going to need an expensive new battery in a few more years. Musk has astutely met that concern with a financing option guaranteeing resale value, but that just shifts the risk to shareholders.

As a result, Tesla's balance sheet will sprout a contingent liability for the "residual value" of those cars, and analysts worry that the amount will quickly rise to hundreds of millions of dollars -- on the order of half of the company's book value. The deferred impact of all those used batteries will become clearer in coming years, after Tesla also starts running low on the government-legislated zero-emission-vehicle credits that offset $68 million in expenses in the March 2013 quarter.

We had hoped Musk would advise us on these points, but our scheduled interview with him ended abruptly on Friday, when he hung up on us.

"I have no interest in an article that debates what we consider to be an obvious point -- which is that there is a dramatic reduction in battery costs," Musk said, after a few questions. "You clearly do not understand the business. My apologies. I am terminating the interview."

ELON MUSK IS NOT A GUY you like to bet against. He co-founded the Internet payment business PayPal, which eBay bought for $1.5 billion in 2002, after he had launched Space Exploration Technologies, the private company whose rockets began resupplying the International Space Station after NASA's own shuttles became museum pieces. Since 2008, Musk has been CEO of both SpaceX and Tesla, while chairing the board of the solar-power outfit
SolarCitySCTY -2.651896609600537%SolarCity Corp.U.S.: NasdaqUSD58
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(SCTY).

Morgan Stanley auto analyst Adam Jonas compared Musk to railroad pioneer Cornelius Vanderbilt and Thomas Edison, in a report last month that called Tesla the best American auto maker and the analyst's top pick.

The Model S is a sensation. Motor Trend anointed it the 2013 Car of the Year, while the curmudgeons at Consumer Reports rated it 99 out of 100. Its electric motor has one moving part -- a simple design that has powered everything from blenders to locomotives since the 1888 patent on an alternating-current motor was issued to the company's namesake, inventor Nikola Tesla. The high price of the Model S lets it pack enough battery capacity to overcome the range limitations that stifle sales of cheaper electric cars.

In a test drive around Manhattan last month, the Model S lived up to its hype. Acceleration was smooth and quiet. The 17-inch touchscreen served up Slacker Radio stations, Google Maps, and anything else on the Internet. Passersby stopped for a look.

Tesla shares began their melt-up last month, when the company said it had sold 4,900 cars in the March quarter, generating $560 million in revenue and its first profit: $15 million, or 12 cents a share. Close examination revealed that the profit followed $68 million in payments from other car makers that haven't met federal quotas for producing zero-emission cars. They can purchase clean-air credits from auto producers like Tesla. Still, Tesla's March sales put the Model S on track for annual sales of 20,000 cars–topping the North American volume of successful luxury sports sedans such as the Audi A6 or the BMW 7 Series (see table). And sales hadn't even begun in Europe or Asia.

Elon's Next Challenge

To address these limitations, Tesla founder and CEO Elon Musk predicts that the third-generation Tesla, to be called Gen III, will open the mass market for its electric automobiles in 2016. Even so, there could be some serious bumps in the road ahead for both the existing and coming models.

• The $90,000 Model S is simply too pricey to achieve high-volume sales. The battery alone, which provides a range of 230 miles, costs tens of thousands of dollars.

• The more affordable Gen III, available in three years, will have a less expensive battery, but at the cost of a shorter per-charge range.

• Tesla is an affluent suburbanite's car. The Supercharger infrastructure of nationwide charging stations, announced last week with much fanfare, won't address the hassles faced by city dwellers, especially in Europe.

• At $102 a share, Tesla will need to sell hundreds of thousands of cars per year to support its stock price. That's unlikely for the range limited Gen III; and the Model S would have to match the worldwide sales of BMW's best-selling car

The stock leapt 50% after the March-quarter results, and the company took the occasion to raise $1 billion on May 24, through a $660 million convertible-note offering, plus the sale of stock at $92 a share, including $100 million subscribed to by Musk. With fanfare, Tesla repaid the remainder of its $450 million government loan and said that it would spend some of its new capital to expand its network of Superchargers–specially equipped locations that can recharge a Model S in a half-hour, instead of the usual overnight span. The network will grow to 100 stations by next year. Musk said he will demonstrate its reach this coming winter by making a cross-country road trip with his kids, "like the Chevy Chase movies."

So much good news for Tesla sent short sellers running for cover, squeezing the stock up to $115 on May 29. "We had to cover," one bear told Barron's. "The position tripled on us in as many months." Longs who had taken margin loans to buy Tesla shares, won big, and none bigger than Musk. Filings show that he raised his equity stake to 28% from 27% with the help of $150 million in loans from Goldman Sachs.

When Tesla investors return their attention to fundamentals, they should think about the company's make-or-break plan to reach high sales volume in 2017 with the Gen III. Morgan Stanley's Jonas notes that the Gen III accounts for 75% of his long-term volume forecasts and two-thirds of his $109 share-price valuation. That forecast anticipates sales surpassing 450,000 units a year by 2027, at higher profit margins and valuation multiples than the rest of the auto industry.

The challenge is battery cost. The Morgan Stanley analyst assumes that it can drop by half, from $400 to $200 per kilowatt hour, and that consumers will accept a driving range below 140 miles. But the U.S. government and industry researchers say the cost performance of batteries is coming down slower than hoped. At GM, Director of Global Battery Systems Bill Wallace believes that battery-capacity costs can improve by about 20% in the next few years, with longer odds of saving 40% if new technologies pan out in five years.

Before ending our interview, Musk said that improvements will cut the cost of the Model S's battery to $10,000-$12,000.

Musk will succeed at establishing Tesla as a valuable brand, even if it winds up confined to the luxury bracket of the Model S and its crossover cousin, the Model X. Tesla stock, therefore, has a floor at whatever price a giant like Daimler might pay to buy the company. But an acquirer wouldn't wildly overpay for the cash flow expected from those luxury lines. Morgan Stanley sees Tesla's free cash flow hitting $400 million in 2016 -- the year before Gen III's expected launch. A Harley-Davidson multiple on that cash flow -- 10 times -- would support a Tesla stock price in the $30s. A BMW multiple of three times would point to a $10 price. Those levels surely undervalue Tesla and Musk. We suspect there'd be plenty of buyers at $50.

The mass-market segment will be crowded by the time Tesla plans to deliver Gen III. Chevy just introduced GM's first all-electric car, the Spark EV, at $20,000 (after the $7,500 tax credit). Consumers seem cool to paying more for an electric vehicle with a driving range that's a fraction of an internal-combustion model's. Disappointing demand drove price cuts last month on Honda's Fit EV and Nissan's Leaf. The category-leading Leaf sold fewer than 10,000 units last year.

We're sure Musk could have told us why potential buyers of affordable electrics still see internal-combustion-powered cars as a cheaper, more convenient choice.